Braemar Shipping Services - investment grade?

Further to this post covering a selection of high dividend yield and low PE companies, here are more details on Braemar Shipping Services (LON:BMS), the second largest shipbroker listed on the London Stock Exchange. They provide broking and consulting services to the global shipping industry across four divisions: Shipbroking, Logistics, Technical and Environmental Services. According to the company these segments “offer a unique set of skills and related services for clients”.

Shipbroking accounts for around 75% of total revenues with the rest split fairly evenly between Logistics, Technical and Environment Services. The shipbroking business benefits from a globally diverse client base, activity in all the major bulk shipping markets and good order book visibility; all of which has helped generate stable earnings in the past.

In the last 10 years adjusted earnings per share have tripled, revenue is up fivefold and the dividend has more than doubled. The average return on equity is over 18% and the return on retained earnings has been around 20%. These results have been consistent with growth in revenues, earnings and dividends in almost every year. 2009 saw a reduction in profits due to the global recession, but most of this has been recovered in 2010.

The company’s excellent results have been driven primarily by growth in global trade and increased demand for natural resources around the world. Although the company has performed well over the last 10 years there does not seem to be any particular competitive advantage beyond being a market leader and a well run company. Their chief rival Clarkson (LON:CKN) has in many ways had a better run of it over the years, so there is the chance that Braemar has had good results solely because of the industry they are in.

Looking to the future, their strategy is to build a broadly-based shipping services group around the core shipbroking business. Growth is expected to be driven by expanding shipbroking geographically, especially into the East.

Estimating future earnings using returns on equity and retained earnings gives an estimated total return in 5 years of almost 160%. Estimating earnings using the historic earnings growth rate gives an estimated total return of around 175%. Typically I want to see a minimum estimated return of 100%, although this level is entirely arbitrary.

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This article is for information and discussion purposes only and nothing in it should be construed as a recommendation to invest or otherwise. The value of an investment may fall and an investor may lose all their money. Any investments referred to in this article may not be suitable for all investors. Investors should always seek advice from a qualified investment adviser.

Clarkson PLC is a United Kingdom-based company, which provides integrated shipping services. The Company's segments include Broking, Financial, Support and Research. The Company's Broking division represents services provided to ship owners and charterers in the transportation by sea of a range of cargoes. It also represents services provided to buyers and sellers/yards relating to sale and purchase transactions. The Company's financial division represents service in investment banking, which specializes in maritime, oil services and natural resources sector. The Company also provides debt and leasing solutions and structured projects in the shipping, offshore and real estate sectors. The Company's support includes port and agency services, representing ship agency services provided throughout the United Kingdom and property services regarding the provision of accommodation. The Company's Research services encompass the provision of shipping-related information and publications. more »

I've been watching this for ages and ACM Shipping (LON:ACMG) for quite a while, but haven't bought as I too see their prices being underpinned by global growth... and I don't have great faith in that at the moment. Nevertheless, I can't look away... the ROE is compelling regardless of the macro picture. Would love to know what others think about it...

Sir Graham Hearne, Chairman of Braemar, said:
"Shipping markets are experiencing a period of progressive weakness which has affected the performance of the group in the first half. In the light of this, we are taking measures to reduce costs, the full effect of which will not be felt until next year. These measures, combined with the capability of our non-broking businesses to make a greater overall contribution, give us confidence in the Group's resilience and we expect an improvement in the second half performance relative to the first half."

Whilst my analysis indicated that in the past there appeared to be little justification for Braemar's non-shipbroking ventures, today's results vindicate the benefits of diversification that he claimed at the AGM. Though shipbroking has been somewhat hammered by the weak market conditions, with segment profits halved compared to the equivalent half last year, note 5. to the accounts shows that Braemar's other businesses (technical, logistics and environmental) have come good and have shown strong profits growth, leading to a respectable overall result, in the light of the earlier profit warning.

I find it encouraging that Hearne is able to say:

we expect an improvement in the second half performance relative to the first half.

Let's hope this half-year marked a bottom in Braemar's fortunes. The dividend sure is sweet, (around 8% yield) while we wait!

The sweet divi gives one some measure of comfort.Am glad they diversified their operations, something I tend to look for in the majority of companies I invest in - gives some margin of safety if one segment experiences a severe downturn. Will add on any further market wobbles...

"Arbuthnot Securities maintained its "neutral" recommendation for Braemar Shipping Services (BMS), but with a reduced target price of 320p, from 340p. The maritime services company is expected to issue an annual dividend of 26p, offering an attractive yield of 7.7%, but the broker notes concern over cyclical difficulties in the industry that are likely to impact the firm in the near term. As a result the broker forecasts a 31% year-on-year decline in pre-tax profits for the 2012 financial year. Braemar shares stayed flat at 339.5p."

My name is John Kingham and I'm the editor of UK Value Investor, an investment newsletter for defensive and income-focused value investors. That means I write about buying large, successful companies with long track records of profitable dividend growth, and buying their shares at low valuations and with high yields. My website includes a unique stock screen and a model portfolio which is managed using a checklist-based investment strategy. The goal of the strategy is to produce a portfolio which combines a high yield and good capital growth with low risk, and which is easy to maintain in just a few hours each month. more »